Bitcoin surged past $74,000 on Monday, with assistance from Japan. The Bank of Japan’s Governor, Kazuo Ueda, tempered expectations for a rate increase at the upcoming April 28 policy meeting amidst economic uncertainty due to potential impacts from the Iran war.
Historically, BOJ decisions have affected the crypto market significantly. For instance, an unexpected BOJ rate hike on August 5, 2024, led to a yen carry trade unwind that caused bitcoin prices to plummet from $64,000 to $49,000 within two days.
The carry trade involves borrowing in yen at low rates and investing in higher-yielding assets like crypto. This strategy has been one of the largest sources of leveraged risk-asset exposure globally. A yen unwind generally results in swift sell-offs in risk assets, with major cryptocurrencies being affected first.
However, Ueda’s recent remarks suggest that this trade will remain stable for at least another month. On Tuesday, Japan’s 20-year bond auction saw its strongest demand since 2019, with a bid-to-cover ratio of 4.82 compared to a 12-month average of 3.27. This indicates institutional consensus that the rate-hiking cycle is on pause.
Following the auction, twenty-year yields fell nine basis points, reaching their lowest in recent times despite being near their highest since 1997.
A dovish stance from the BOJ maintains a weaker yen, currently around 160 against the dollar. This weakens yen carry trade funding, supporting leveraged positions across risk assets, including perpetual futures markets where bitcoin’s rally is gaining momentum.
Recent data revealed $2.1 billion in new bitcoin open interest and $2.2 billion in ether open interest within 24 hours following a ceasefire announcement, with coin-denominated OI indicating net new longs. Some of this positioning may be funded by the same yen liquidity that Ueda has preserved.
Japan’s economy is highly reliant on oil imports through the Strait of Hormuz, accounting for over 90% of its supply. If U.S.-Iran negotiations result in a deal and oil prices drop further, Japan’s inflationary pressures could decrease even more, reducing incentives for the BOJ to raise rates and prolonging the period during which the carry trade supports risk assets.
Consequently, the BOJ’s cautious approach provides additional support behind bitcoin’s recent breakout. The $73,000 resistance level remained intact for six weeks partly due to macroeconomic headwinds such as oil prices, interest rates, and geopolitical tensions, offering no impetus for leveraged traders to break through.